SEC Fails Investors on Fiduciary Rule

    Protecting investors?

    It has been one year since the Securities and Exchange Commission (SEC) delivered a report to Congress recommending the adoption of a universal fiduciary standard regulation that would apply to retail advisers and brokers. Now it looks like this long-overdue rule will not even be considered during 2012.

    The average person would think a year is enough time to consider the fiduciary question, especially since the ideas has been floated at the SEC for years.

    But in a January 12, 2012 letter to Rep. Scott Garrett, (R-N.J.), chairman of the House Financial Services Capital Markets Subcommittee, SEC Chairwoman Mary Schapiro said the agency needed more time to conduct an economic analysis of the impact of a the “ standard-of-care regulation.”

    Hardly Friends of Investors

    In her letter, Schapiro said the “SEC staff, including (Division of Risk, Strategy and Financial Innovation) economists, are drafting a public request for information to obtain data specific to the provision of retail financial advice and the regulatory alternatives.”  If this were not such as serious matter, individual investors would see the Orwellian humor in this this division being associated with “Financial Innovation.”

    According to Barbara Roper, director of investor protection at the Consumer Federation of America, whether the fiduciary-duty rule will ever be enacted now hinges on whether Obama gets re-elected.

    The reason: If a Republican is elected in November, the SEC will move from a 3-2 Democratic majority to a 3-2 Republican majority, delaying the implementation of any unfinished Dodd-Frank provisions.

    SEC Never Serious About Fiduciary Rule

    Announcing that the SEC now needs more time to conduct an economic analysis after entertaining this proposal for a year shows the SEC was never serious about advancing this long-overdue rule. What’s also not clear is whether this economic impact study will include the costs to investors, as well as to the financial industry. My bet is that if the investor cost can be determined, it will dwarf that of the financial services industry.

    This delay also emphasizes that SEC Chairman Schapiro is one of President Obama’s worst appointments, one which will continue to haunt him as he moves into election mode.

    The reality is that individual investors have not had an advocate at the SEC since Arthur Levitt served as chairman from 1993 to 2001.  Since then, individual investors have suffered through SEC chairmen who ranged from hacks (Richard Breeden) to shysters (Harvey Pitt) to political appointees (some of whom were well-meaning) who simply were ground down by professional lobbyists and powerful financial services forces seeking to protect their wealth.

    This helps explain why throughout the post-1987 SEC, individual investors have not seen advances in regulatory reform which would put more money in their pockets and less into the hands of professional money managers, salespeople, and industry executives.  This is not surprising since that is the way the SEC has evolved since it was created in 1934. To fill this void, investors have relied on the Attorney General of New York to pursue Wall Street abuses.

    Schapiro: Obama’s Worst Appointment?

    SEC Chairwoman Schapiro is a political creature.  She previously served as a SEC Commissioner from December 1988 to October 1994; was appointed by President Ronald Reagan, reappointed by President George H.W. Bush in 1989, and named Acting Chairman by President Bill Clinton in 1993. She left the SEC when President Clinton appointed her Chairman of the Commodity Futures Trading Commission, where she served until 1996.  To appease this diverse group of high-powered politicians and financial industry titans, she must have learned what issue to handle and what to let die.

    As a professional bureaucrat, she was CEO of the Financial Industry Regulatory Authority (FINRA), which she joined in 1996 as President of NASD Regulation, and was named Vice Chairman in 2002.  While at FINRA, she received a $9 million bonus for her work.  She probably is the most highly-compensated financial compliance executive in U.S. history, and stands to make millions more when she leaves office to become a financial industry consultant.  In her future roles, that job will probably include preventing industry reform, which is the same thing she is now doing from the inside.

    Since Schapiro was considered a “team player,” in the words of Treasury Secretary Timothy Geithner, she was selected over Sheila Bair, former head of the FDIC, known as more independent pro-investor thinker, to become head of the SEC.

    For example, in the fall of 2009, SEC Chairwomen Mary Schapiro said the Commission was scheduled to begin hearings on the role of 12b-1 fees.  Given the importance of 12b-1 fees and the role they play in subsidizing fund marketing expenses, it was odd that Schapiro was so optimistic on what could be done.  To date, nothing has been done on this issue either, much to the detriment of individual investors.

    Now, the DOL, and not the SEC, has moved to the forefront of promoting investor reform with its new rules on adopting fee and revenue sharing disclosures for 401(k) plans.  These new rules go into effect April 1, 2012 thanks to the persistence of Phyllis Borzi, Assistant Secretary for Employee Benefits Security at the DOL, who resisted industry hand wringing and cries of woe that more time was needed to study the issue.

    A Failed Mandate

    In her official SEC biography page, Schapiro said she is dedicated to “protect investors and vigorously enforce the rules; and working to deepen the SEC’s commitment to transparency, accountability, and disclosure while always keeping the needs and concerns of investors front and center.”

    Given her record, she should be matched to these same standards.

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    Chuck Epstein has managed marketing communications and public relations departments for major global financial institutions and participated in the launch of industry-changing financial products. He also has written by-lined articles for over 50 publications, five books and served as editor and publisher of nation’s first newsletter on the topic of using the PC for personal investing and trading. (“Investing Online, 1994-1999). He also is a marketing consultant, writer and speaker on topics related to investor protection and opportunities in the very dynamic cannabis industry. He has held senior-level marketing, PR and communications positions at the New York Futures Exchange, Chicago Mercantile Exchange, Lind-Waldock, Zacks Investment Research, Russell Investments and Principal Financial. He has won national awards from the Mutual Fund Education Alliance (MFEA) and his web site,, was named best small blog in 2009 by the Society of American Business Editors and Writers (SABEW).


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